Wells Fargo Reports Earnings Under Its 'Reversion to the Mean'

Wells Fargo & Company (WFC) slipped to third place among the four "too big to fail" money center banks during the first quarter of 2018. This was caused by the numerous scandals that have rocked the banking giant. At the end of the third quarter, the bank had $1.684 trillion in assets according to data from the Federal Deposit Insurance Corporation. This is 9.5% of the total assets in the banking system.

Wells Fargo was an important underwriter of mortgages, but in August, the bank began laying off 600 mortgage workers. This is just one warning as the banking giant prepares to release earnings on Jan. 15. The stock closed Thursday at $47.75, up 3.6% so far in 2019, but it remains in bear market territory at 28% below its Jan. 29, 2018, high of $66.31. The stock is up 11% from its Dec. 26 low of $43.02.

During the credit crisis in 2006 through 2008, Wells Fargo purchased Wachovia. Wells Fargo had problem loans in home equity lines of credit (HELOCs), as it offered these products to homeowners when the first lean mortgage was at a different bank. Wachovia was overexposed to mortgages that had hard-to-describe adjustable rates that were hurt by huge increases in interest costs to homeowner victims.

Small businesses with accounts at Wachovia were in for a shock as soon as the Stage Coach and Wells Fargo name came to their bank. Wachovia offered business lines of credit at 200 basis points above the prime rate. Within months, this was raised to 600 basis points above prime. Businesses credit card rates spiked as well, and Wells Fargo began to charge fees that it should not have.

Recently, a small business that wanted to access its line of credit to expand went online only to find out that the line was cut without notice. It was all based upon a warning sent to the bank by a credit bureau. It seemed to be an artificially intelligent policy, and the business never got an explanation that made sense. My conclusion is that, despite the pledge, banks do not want to lend Main Street U.S.A. Unfortunately, personal bankers have become zombies attached to their computers, which are the ones making the decisions.

Analysts expect Wells Fargo to post earnings per share (EPS) of $1.19 when it reports results before the opening bell on Jan. 15. The big bank missed EPS estimates in three of the past four quarters. In my opinion, banks are feeling the pinch of record global debt and pressure from the Federal Reserve unwinding of its balance sheet.

The daily chart for Wells Fargo

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The daily chart for Wells Fargo shows that the stock has been below a "death cross" since Oct. 11, when the 50-day simple moving average declined below its 200-day simple moving average, which indicated that lower prices would follow. This led the stock to its Dec. 26 low of $43.02. The chart shows five horizontal lines. The lowest is my weekly value level at $45.33. The other four lines are my semiannual, quarterly, monthly and annual risky levels at $51.12, $51.44, $54.14 and $63.29, respectively.

The weekly chart for Wells Fargo

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The weekly chart for Wells Fargo shows that the stock needs to close above its five-week modified moving average of $48.79. The stock has been tracking its 200-week simple moving average, or "reversion to the mean," since the week of Feb. 12, 2016, when the average was $45.73. Today, the stock is well below the average of $53.40. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 23.05 this week, up from 17.35 on Jan. 4 and moving above the oversold threshold of 20.00.

Given these charts and analysis, investors should buy Wells Fargo shares on weakness to my weekly value level of $45.33 and reduce holdings on strength to my semiannual and quarterly risky levels at $51.12 and $51.44, respectively.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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